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Managers Bullish on Large Caps After a Confounding Q1

NEW YORK (TheStreet) -- Woeful first-quarter performance from Best Buy(BBY - Get Report) and Staples(SPLS - Get Report) encapsulate a key theme of the market this year: Investors are dumping stocks priced to perfection when business performance gets shaky and shunning sectors, such as consumer discretionary, perceived as overvalued.

This was meant to be the year stocks traded on fundamentals and less on macroeconomic policy moves, given the wind-back of stimulus from the Federal Reserve. Instead, a resurgence of risk aversion on emerging market debt woes, the Ukraine crisis and Chinese growth concerns has rattled markets.

The first quarter saw gold soar on its safe-haven status, notching 6.66% to outperform the S&P's 1.39% return. Fears around lower-than-expected growth for China -- the world's largest commodity consumer -- triggered a nosedive in the price of iron ore, copper and other key commodities.

In the same vein, conservative utilities were the best performing equity sector, up 8.95%. Utilities are effectively a bond proxy and their popularity illustrates risk aversion and reaction to a backdrop where rates will not rise as fast as anticipated.

As concern grows around valuations, investors have dropped last year's best performing sectors: consumer discretionary posted 37.7% in 2013 but has shed nearly 3% this year. Media jumped 43.6% last year but slid 1.7% in the first quarter. Unsexy utilities inched up just 6.82% in 2013 but have upstaged IT stocks and other high profile sectors so far this year.

"This shift suggests glamorous, high-momentum types of stocks are less in vogue [and] speaks to the fact the market appears to be experiencing a rotation away from growth and into value styles," BlackRock global chief investment strategist Russ Koesterich told clients Monday.

He noted that over the past month, large-cap value stocks have gained roughly 1.25% while large-cap growth has lost over 2%.

If this rotation continues, U.S. large and mega-cap stocks would be key beneficiaries as they trade at a significant discount to small and mid-cap stocks, the strategist added.

His commentary underscores a backdrop where even small-cap specialists such as Russell Investments expect small caps to underperform the broader market this year.

On the ETF front, first quarter fund flows favored developed equity markets, real estate investment and Russia "bear" sentiment funds while emerging market vehicles and those bullish on Russia were smacked. Volatility also kicked up and is expected to stay higher this year.

Just as Best Buy and Staples encapsulated the worst first-quarter stock stories -- punished after posting lower sales in a highly competitive retail environment -- Forest Labs(FRX) and Nabors(NBR - Get Report) underscored the best.

Forest Labs jumped on news the drugmaker would be acquired by Actavis, with investors rewarding M&A activity as organic growth continues to look tough. And Nabors popped 45.4% after surprising to the upside on earnings as higher natural gas prices created a more favorable backdrop for onshore drilling.

As investors look ahead, it's little wonder the first quarter dynamic has them feeling confused: The market seems intent on pushing new highs even as economic data remains mixed, macro risks linger and risk aversion persists.